Citigroup: After Weill, Who?

June 24, 2002

By Amey Stone Citigroup's investors get jittery when reminded that its legendary captain, Sandy Weill, won't be there to steer the ship forever. Weill is a strong leader with an excellent track record, but he's 69 and hasn't chosen a clear successor yet. Citigroup (C), which he systematically built through a series of bold deals, now has more than $1 trillion in assets, 200 million customers, and operates in more than 100 countries. Managing this behemoth is no easy task.

Citi reminded investors of the potential leadership vacuum on June 11 when it reshuffled the top management decks. Essentially, instead of having one person in charge of emerging markets and three other heads of major product lines in developed countries, Citi now has one person in charge of major product lines worldwide.

CHANGING PLACES. Bob Willumstad, who's also Citigroup's president, heads all global consumer businesses (that's credit cards, consumer lending, and branch banking). Mike Carpenter heads the global corporate and investment bank, including Salomon Smith Barney, and Tom Jones handles the money-management arm. Working with these new global product heads is Deryck Maughan, appointed CEO of Citigroup International. Victor Menezes, who had run Citi's emerging-markets business, assumed the title of senior vice-chairman and has a variety of management roles but no longer has a business line reporting directly to him.

The move's goal, according to Weill, was to improve "control and coordination between our product functions and global geographic businesses." Most analysts felt that it simply clarified a top management structure that was already in place. But the move prompted speculation about who would succeed Weill when he inevitably steps down.

Probably the main reason Weill won't leave now is that, like any champion, he will want to retire at the pinnacle of his career. For him, that would require that the share price regain lost ground. The stock is now at $40, down from $54 a year ago, and its price-earnings ratio is a lowly 13.

TIME TO BUY? The decline is mainly because Citigroup's massive size and diversification make its stock trade in line with the global economy. Credit quality of companies and consumers is faltering. The stock market is sliding, and investment banking is weak. Citigroup recently laid off more people in its investment bank, which investors took to mean that no signs of improvement are visible on the horizon. Weill, who has championed shareholder value throughout his long career, is unlikely to step down while the stock price is stalled.

Value investors, some of whom say the shares are worth $55 each and point out that it's at the low end of its historical p-e range, say periods of industrywide weakness like now are the best time to buy. "Citigroup is very cheap here," says Robert Olstein, portfolio manager of the Olstein Alert Fund (see BW Online, 6/19/02, "'Stop Worrying, and Start Buying'").

Standard & Poors analyst Stephen Biggar expects a modest economic recovery in the second half of the year that will lead to a pickup in capital markets activity as well as a stabilization of credit quality. Even without that, he thinks Citi's stock is worth $55 a share. "Really what you're paying for is consistency of earnings," he says.

ENVELOPE PUSHING. But these days, earnings consistency has become a bad word, and Citigroup's financial results are complex. Olstein, however, is confident that they're sound. "Sure, they push the envelope, but I know where they're pushing," he says. For 2001, Citigroup reported core income of $15 billion, or earnings per share of $2.81 (a 3% climb over 2000) after taking into account the impact of Enron, Argentina's crisis, and September 11.

Revenues were $84 billion, up 8% over the prior year. In the first quarter, Citi reported core income of $3.9 billion, up 5% over the same quarter in 2001, including an $816 million pretax charge related to exposure to Argentina's troubled economy.

The truth is: Weill isn't going anywhere soon. Even at 69 and running the world's largest financial-services company, he has a lot to prove. King of Capital: Sandy Weill and the Making of Citigroup (Wiley, June 2002), a biography I co-authored with Mike Brewster, paints a picture of a man who's full of energy and drive -- with plenty of goals still to reach. Citigroup may seem the culmination of a long and successful career, but to Weill, it's a work in progress.

GOALS TO HIT. Still on Weill's to-do list, as the recent reorganization makes clear, is to better manage Citi's global operations so it can sell more U.S.-style financial products around the world. The management change "allows us to focus more intensely on pursuing our goal of being truly 'best-in-class' in each of our product areas, across the more than 100 countries we serve," Weill said in the June 11 statement. He also has to reduce the kind of risk Citigroup has taken in developing countries, like the first-quarter Argentina hit.

Another Weill goal: Proving that cross-selling financial-services products can succeed. His life's work -- building a financial conglomerate -- depends on him being able to show that the company can cut costs and improve profits by giving one sales force more products to sell (see accompanying book excerpt). Not everyone concurs. Richard Bove, an analyst with firm Hoefer & Arnett, believes that Citigroup has become bloated and that Weill is an "empire builder for empire building's sake." He thinks Citigroup should be pared down to its leading divisions -- its corporate bank and credit-card business.

Weill couldn't disagree more. He has demonstrated that Citi can gain more corporate business by being able to offer companies both lending and investment-banking services. But that practice -- and the risk of being overly exposed to one corporate client -- has come under fire, courtesy of Enron's downfall (Citigroup took a pretax earnings hit of $228 million last year on that one customer).

BAD RISKS. On the consumer side, skeptics of cross-selling's potential for increasing profits abound. There, too, Weill has to prove he can make it work -- or else Citigroup's vast structure ultimately won't make economic sense. He was forced to acknowledge that cross-selling to consumers doesn't always boost profits when he spun off Travelers Property Casualty (TAP) in a public offering earlier this year. Weill admitted that an element of adverse selection was at work, and the property-casualty customers gained through cross-selling turned out be bad risks. (Citi retained the life insurance side of Travelers.)

Looking forward to the post-Weill era, all five men at the top of Citi's new management structure are potential candidates, with Maughan's added responsibility giving him an edge in the near term. But other candidates exist. Some analysts speculate that the young CFO Todd Thomson, 41, is being groomed for the top job or that Weill will "acquire" a successor through a merger with another financial-services company (Thomas Hanley of Friedman, Billings, Ramsey has written that he could see Weill one day acquiring Bank One (ONE), run by Weill's former protégé Jamie Dimon, for that purpose).

In the meantime, Weill's legacy -- creating a financial giant that can post steady earnings growth in good times and bad -- has been put to the test by the past year of economic and political turmoil. So far, he's managing the earnings part. And if past is any indicator, the share price should eventually follow. Weill isn't going anywhere, and for Citi investors, that's reason for relief. Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column